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It pays to be active

We should be proud of our retail investment fund industry. Really proud.

Over the years, it has helped millions of investors build long-term wealth. In some instances, investors have become Isa millionaires. It is an example of an industry that has put the great in Great Britain.

Great brands – the likes of Invesco Perpetual, Jupiter and Schroders (and many more besides). Great iconic fund managers – none better than Neil Woodford.

Of course, the industry’s success has made scores of its most impressive investment fund managers and executives seriously rich along the way.

Indeed, many of them live in upmarket Kensington in west London whose gold-paved streets I tread every day on my way to work (they occasionally greet me with a royal wave before revving up their Porsche Cayenne and dashing off to work in a plume of exhaust fumes).

Providers of certain investment platforms have also prospered – and well done I say (not an ounce of envy in me).

Yet, no sector, however successful, is ever immune from close scrutiny – or from pressure to change. The retail investment fund industry is no exception.

In recent years, the industry’s reliance on ‘active’ fund management – breathing humans at the wheel rather than computers – has increasingly come under the spotlight. As has the charges it heaps on investors, either disclosed or hidden from view. The cry for more passive investment management becomes louder by the day.

I was made fully aware of this a few days ago when I tweeted an article I had written on Douglas Brodie, a shrewd investment manager at investment house Baillie Gifford.

The Edinburgh-based investment house is perceived as conservative with a small C from the outside, but it is radical in pursuit of investment performance. Its managers are bred to stock pick. Index tracking, closet index tracking, are an anathema.

Mr Brodie manages the Global Discovery Fund, and he does it with aplomb. Through astute stock picking, he has delivered three-year returns double those of the average global investment fund and way in excess of the FTSE All Share Index (the benchmark all investment funds should be measured against).

Yet my review of Mr Brodie’s intelligent investment approach – hunting down the business stories of the next decade – did not go down well with some financial experts. All kinds of brickbats were hurled my way.

“All flipping coins”, said one expert, describing what he thought active funds managers bring to the investment party. “Some of them will have six heads in a row.” In other words, active fund management is all about luck rather than shrewd investment judgement.

Another was more acerbic. “Why, Jeff, why?” he asked. “Helping to perpetuate the myth that lead can be turned into gold. Shame on you.” Translated, this read: “active management bad, passive management good”.